4 Recent Developments Suppressing The Hype Over Advanced Biofuels

by: Kevin Quon

Public advanced biofuel companies have experienced an industry-wide drop in recent times, and many are coming off their first year as publicly-traded entities. As a sector holding much promise in light of a growing need for an alternative energy agenda, advanced biofuel hopefuls have long been viewed as a critical component in aiding in this transition away from fossil fuels. Distinguished apart from their first generation predecessors such as Pacific Ethanol (NASDAQ:PEIX) and Archer Daniel Midlands (NYSE:ADM) that use existing technology and food-based feedstocks to create ethanol, public companies associated with the creation of fuels from non-food feedstocks have long been imbued with lofty expectations in their short public lives. Yet over the past few months, that hype that had so easily surrounded the recently IPO'd companies has all but given away it's shiny luster. Now characterized with a more sobering reality of longer-term timeframes and market disruptions, recent developments have appeared to chime in as if to cue a coup de grace for those investors who suddenly woke up and realized that it's not all roses and butterflies along the road being paved for tomorrow.

Name IPO Year IPO Price Last Price (2/21/12) Cash Raised Mkt. Cap.
Codexis (NASDAQ:CDXS) 2010 $13/sh $3.70 $78 M $133 M
Amyris (NASDAQ:AMRS) 2010 $16/sh $5.90 $85 M $269 M
KiOR (NASDAQ:KIOR) 2011 $15/sh $10.11 $150 M $1.03 B
Gevo (NASDAQ:GEVO) 2011 $15/sh $9.57 $123 M $248 M
Solazyme (SZYM) 2011 $18/sh $11.87 $227 M $707 M

With their public offerings, advanced biofuel makers gained a critical influx of capital necessary to evolve their technologies from concept to reality. With production capacity as the mandatory hurdle to cross, such companies began to enact upon their business models through several different approaches. Yet as is the case in all new industries, not everything goes according to plan. Recent developments have only highlighted the unforeseen risks involved in early-stage investment:

  • Amyris. Amyris Backs Away From Making Biofuels. As the 5-ton elephant in the room, the announcement by Amyris to withdraw from its intent to scale up production has sounded alarms across the industry. The company had originally planned to produce 40 to 50 million liters of farnesene in 2012 along with two plant facilities capable of 150 million liters of annual production. Yet woes in translating its proven technology to work on the commercial scale over an extended time period played a large part in the decision to hold off on moving forward with the company's original plans.
  • Codexis. Codexis Management Leaves Company. The recent loss of the company's CEO and CFO has left many investors wondering what the outlook is like for hard-hit company. A disappointing wind down in the company's CO2 capture solution research in 2011 showed the difficulty the company could face in commercializing some of its potential technology focuses.
  • Ceres. Ceres Delays IPO. As a seed company specializing in the evolution of non-essential food feedstock crops, Ceres is developing enhanced products that will likely one day be necessary to increasing biofuel production. Yet the company suffered a poor showing as an IPO candidate and a recently released notice hinting of expected revenue shortfalls. In doing so, the company both demonstrated and perpetuated an increasing lack of interest in the realm of advanced biofuels.
  • Kior. Artificial KiOR Interest Conspiracy. Fortune writer Dan Primack helped clear up some of the hearsay circulating behind the scenes of KiOR. Speculative reasoning appears to have left a negative connotation regarding the company's backers. Investors second-guessing the worth of their holdings can do no good for the company. Likewise, such reminders that investing in start-up companies offer unique dangers can only subtly hinder the sector as a whole.

As this nascent industry aches with the growing pains found in bad news, the hype surrounding such companies has deflated in such a rapid fashion that it poses the question if the worst has already been made known. For the most part, the technology surrounding these companies continues to grow stronger and gain wider acceptance even as the companies face bumps along the road. Yet for some companies, like Solazyme, their development plans have even thus far exceeded their outlined expectations despite their hard-knocked share price along with their industry peers. In its most recently released quarterly results, the company disclosed it had delivered its entire fuel commitment to the US Navy several months ahead of schedule. The company also asserted it had successfully tailored unique oil profiles for specific markets areas, an R&D accomplishment that is likely to offer exclusive comparative advantages going forward in its products on a case-by-case basis.

Overall, while the hype surrounding this industry has all but disappeared, the pricing of more reasonable expectations should bring about more stable charts in the months to come. As the window of an opportunistic IPO closes for other private biofuel companies that are struggling to come online, there remains a comparative advantage for those who have already become public. Investors able to see past the current smoke surrounding the sector may do well in performing their due diligence. Taking opening positions in such a downtrodden group of stocks by investing in those that have shown market leadership can prove to be a profitable strategy when the outlook of the sector itself remains unchanged.

Disclosure: I am long CDXS, AMRS, SZYM.